BofA: Pound Sterling to Rise Against the Euro in 2026
- Written by: Gary Howes
- GBP/EUR towards 1.19
- JPY faces notable structural headwinds
- USD to see a gradual decline
Image © Bank of England
Bank of America swims against the consensus and backs the pound.
The consensus amongst investment bank analysts is that 2026 will be characterised by further underperformance of pound sterling.
"We're happy to take the other side of that," says Adarsh Sinha, FX and Rates Strategist at Bank of America, in a media briefing Thursday.
He opined that consensus year-ahead views tend to get burned out pretty early in any given year.
Ideas previously seen as contrarian can be adopted quickly as traders look for a new anchor. And, judging by their year ahead outlook, the pound could be one of these contrarian winners.
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The pound is down 5% against the euro this year, and the consensus is extrapolating that trend into another year.
The euro was bolstered by expectations for a Eurozone economic rebound and an end to the ECB's rate cutting cycle, while the sterling leg of decline rested on economic disappointments and anxieties about the direction of the UK's fiscal policy.
A premium was demanded of sterling into the November budget, with investors concerned the government would announce policies that would upset the bond markets.
With the budget having passed without drama for FX and FI markets, the pound is at a fork in the road: does that risk premium dissipate or does it become entrenched?
Bank of America thinks the former: that premium can continue to lift, and the pound will do so too.
"This Budget has the buy-in from the OBR (who prepare macro forecasts for the Government) and the Chancellor has reinforced the commitment to keep the Fiscal Rule and raise the Fiscal Headroom. These are important anchors which should lead to a relief rally in GBP as the release valve of event risk has passed," says Bank of America's year-ahead outlook.
BofA forecasts EUR/GBP at 0.84 by year-end, which gives a pound to euro conversion of 1.19.
Following on from the dollar's largest annual decline since 2017, more weakness is in store next year, which makes for a GBP/USD year-end forecast of 1.45.
Of the Dollar, BofA says:
"We expect this trend to continue into 2026, albeit at a more moderated pace. Heading into next year, many of the same themes/conflicts in markets remain unresolved," says Bank of America.
Speaking to the media, FX strategist Alex Cohen explains a potential risk for the greenback is a building risk premium surrounding the role of the Fed and its independence.
"The administration is clearly discussing affordability," Cohen says, adding that it's looking at addressing the issue "through the lens of lower rates."
Above: File image of Kevin Hassett. He's a Trump ally, heavily favoured to replace Jerome Powell as Fed Chair. Copyright: U.S. Government Work.
Lower real rates, thanks to Fed rate reductions, and potential concerns over Fed functionality under a new Chair tied to White House policy, would pose headwinds to the dollar.
Another anti-consensus view adopted by BofA is to bet against the yen.
Yen upside is a strong consensus view for next year, largely on account of the Bank of Japan raising interest rates. However, BofA thinks the structural headwinds are too significant and they're also happy to swim against the flow here.
"Japan is seeing structural outflows... Japan has been a cash rich society for many years," says Sinha. "Inflation is no longer zero, and when inflation is no longer zero that's a problem."
Households and corporates are diversifying as cash is put to work, and most of that diversification is ex-Japan.
"As long as that continues, the yen will remain structurally weak," says Sinha.
USD/JPY is forecast to end the year at 155.
